Shareholder activism

The shareholders are the owners of a company. Their responsibility is to approve or disapprove the annual financial statements of the company, appoint the board of directors, appoint the auditors and approve or disapprove a dividend as proposed by the directors.

In many companies, some or all of the shareholders sit on the board of directors and are even involved in the day to day management. However persons that have a dual or triple role need to understand their responsibilities change depending on which role they are fulfilling at that point in time.

These issues arise also in public companies, where the CEO would also be a member of the Board as well holding shares in that particular company. It is understandable that the different roles may dovetail into each other, which raises a concern for the minority shareholders. This gives rise to minority shareholders initiating actions when they become dissatisfied with the company’s performance.

In Malta we have the Association of Small Shareholders that is doing sterling work in harnessing the various investors that have ventured into Malta’s capital market through the purchase of equity or bonds. It is probably the only example we have of shareholder activism.

In other countries, shareholder activism is also evident through institutional shareholders such as hedge funds, who seek to influence the way a company is operating in order to enhance the value of their shareholding or to pursue other priorities such as social objectives or to ensure good corporate governance.

There is a great deal of controversy as to how beneficial shareholder activism is. Some claim that companies with active and engaged shareholders are more likely to be successful. Active shareholders can improve corporate performance by better monitoring. Those opposed to shareholder activism claim that it is disruptive and opportunistic and may lead to misguided action by active shareholders who lack the skills and the experience and follow their own benefits and agenda.

Another point to consider is that proposals put by shareholders at annual general meetings are not legally binding even if they would have received the majority of the votes.

I believe that shareholder activism is part of the democratization process that the business world has to go through. So it should be viewed as something positive. Moreover there is no doubt that shareholder activism helps to raise the awareness for critical topics and leads to a better acceptance of shareholder needs by the Board of Directors and management.